Business Startup

Social Media Legal Issues: (Post Number 1): How to Effectively Use Sweepstakes as a Promotional Tool While Complying With Applicable Law

Social media platforms are an ideal way for businesses to spread brand awareness through sweepstakes and other interactive promotions. We are starting our series on “Social Media Legal Issues” with a post on sweepstakes, because sweepstakes are fun, they help to illustrate the power of social media, and sweepstakes are a prime example of an old legal issue that is taking a new form as it is applied to the novelty of social media.

Like social media generally, sweepstakes are interactive and frequently shared with others. Despite the usual knock to their odds, people like telling others about offers of free merchandise or services. And people love to tell others about any free stuff they receive. While sweepstakes have been around for a long time, the internet has made them simple and cost-effective to administer. And social media introduced a platform through which people can share opportunities and stories of the “luck” to a broad audience. Businesses can leverage these human and social media traits to raise brand awareness incredibly quickly. So sweepstakes can be a valuable part of any social media strategy. But every business should consider the following questions before moving forward with a social media promoted sweepstakes:

1.      Is my sweepstakes actually an illegal lottery?

The difference between a sweepstakes and a lottery can be subtle, and in nearly every state a lottery is illegal unless used for specific and highly regulated purposes (states prefer to maintain their monopoly). Accordingly, your promotion (virtually) must be a sweepstakes to avoid running afoul of the law.

A lottery is a promotion in which a prize is awarded to a winner based on chance, and the winner gives to the promoter consideration in exchange for the chance. The quintessential lottery is one in which you pay a dollar for a set of random numbers that could potentially net you millions if your “lucky” (i.e. randomly chosen) numbers are drawn. Generally speaking, to transform an illegal lottery into a legal sweepstakes, you must eliminate one of the lottery’s elements: the prize, the element of chance, or the consideration.

A prize is anything of value awarded to the winner. You could eliminate the prize element if you want to be certain your promotion will fail. Who wants to enter a contest for a chance to win nothing? Instead, it is advisable to eliminate either the element of chance or the exchange of consideration.

Eliminating the element of chance is fairly straightforward, but also brings about a unique set of issues. A “lottery” or “sweepstakes” without chance is essentially a contest, and therefore the entrants must be judged on specific criteria. While this type of promotion could be a valuable part of your social media strategy depending on your business, contests requiring specific judging criteria can be onerous to administer and are often not as well suited to raising brand awareness. Frankly, people are not always interested in entering a contest, because contests require them to do something that may be time or labor intensive. It is generally much more conducive to raising brand awareness to allow people to be a part of the promotion (and thus the discussion of your brand) without requiring them to expend considerable effort. (Though the element of chance can also be eliminated by awarding a prize to every entrant, for many social media promotions this will be neither viable nor economically feasible.)

Accordingly, most sweepstakes are run by eliminating the element of consideration. Consideration is broadly defined as something of value given by the entering party to be a part of the promotion. By eliminating consideration, your lottery can be transformed into a legitimate sweepstakes.

But eliminating the element of consideration is not always as straightforward as it seems. First of all, you have to find the meaning of “consideration” in the state(s) where you will offer the promotion. Of course, requiring the purchase of a product or service in order to enter a sweepstakes constitutes consideration. And some state regulators have deemed simply requiring internet and computer access to be consideration. Though the stance that internet and computer access constitutes consideration has largely been reversed, there is still significant legal “grey area” with respect to whether collecting e-mail addresses or requiring newsletter subscriptions in exchange for entry is consideration. There is no uniform law dictating how much effort must be expended for “consideration” to be present. Instead, this question of fact is often decided on a case by case basis.

While offering a free, non-digital means of entry is often the best way to avoid the element of consideration, the non-digital and free entries must be treated equally with “normal” or “paid” entries. This can be particularly troublesome with offers where the first 50 or 100 entrants are entered for a chance to win, because the speed of online entries constitutes a significant advantage. There is also a question of whether you must require a waiting period to collect mail-in entries after the expiration of your online promotion, because online entrants would technically be given more time to enter the sweepstakes. Because the law governing these issues varies between the 50 states, the element of consideration should be carefully considered before implementing your social media promotion. You should consult with an experienced attorney or sweepstakes administration company before moving forward.

2.      Now that I am confident I am not running an illegal lottery, do I have to register my promotion or post a bond?

Part of the beauty of social media and the internet generally is that they do not know state or national borders. People and businesses can communicate and engage in commerce across borders with very little “friction.” However, state laws regarding lotteries apply to the social media and the internet, and they often vary significantly. While you should be familiar with federal and state laws governing online advertising, it is particularly important if you plan to administer an online sweepstakes. Certain states like New York, Florida, and Rhode Island require you register and post a bond before administering a sweepstakes if the prize value exceeds a certain threshold. Many other states require you to post the names of winners and keep records of your sweepstakes for a specified period of time (often 3+ years). While you can avoid these requirements by prohibiting entries from residents of these states, it may be detrimental to your promotion and your brand (after all, more than 10% of the US population calls New York and Florida home). Therefore, you may want to contact an attorney to discuss the requirements for your particular promotion.

3.      Should I be worried about international laws applying to my promotion?

In short, yes. Your promotion is subject to the laws of any country in which it can be accessed, which means pretty much anywhere. Some countries completely ban sweepstakes and lotteries, while others require registration and the payment of fees. The laws vary widely, and the consequences for non-compliance can be significant. Accordingly, unless you are comfortable with your knowledge of local law in the particular country, you should limit participation in your sweepstakes to US residents.

4.      What other laws and regulations should I be concerned about?

In addition to the laws specifically governing sweepstakes, when administering a sweepstakes you must comply with laws governing marketing practices (deceptive marketing, CAN-SPAM, etc.), privacy and the collection of personal information, online protection of children (COPPA), and various intellectual property issues (copyrights, use of trademarks, etc.). These issues are outside the scope of our coverage in this post, but stay tuned to this series for more information on each of these issues as they relate to social media generally.

You must also comply with the conditions imposed by the social media platform you are using. Facebook has specific guidelines that require, among other things, you use a third party application to facilitate entry into the sweepstakes. Though less onerous than Facebook, Twitter also has its own set of specific rules governing “contests”. Google+ simply does not allow any contests. No matter the platform you choose to employ, you will want to carefully consider the applicable rules. A comprehensive social media strategy, including promotions intended to raise awareness of your brand, will be ineffective if you are disallowed from being a part of the conversation because you violated your social media site’s terms and conditions.

5.      How should I document my sweepstakes to comply with the law and protect myself?

A comprehensive “official rules” document should be included with every sweepstakes to avoid running afoul of the law and angering or alienating your customers. Though you should include these provisions regardless of the states in which you will administer your promotion, many states require you to include information concerning: (1) how to enter the contest, (2) how you will determine the winner, (3) the odds of winning, (4) the time zone specific duration of the sweepstakes, (5) where, when, and how the winners will be announced, (6) eligibility (e.g. age, residence, and excluding employees, family members, etc.), (7) where to request a winner’s list, (8) detailed prize information, (9) how each entrant’s information will be used, and (10) who the contest sponsor is. In addition, you will likely want to include terms governing (a) your right to use the winner’s name and/or likeness as a future promotional tool (i.e. publicity release), (b) a disclaimer of liability, (c) a disclaimer of responsibility for technical issues, (d) the right to cancel or amend the sweepstakes and its official rules (though you should still be very careful about deviating from the original rules), (e) how you will deal with unforeseen circumstances (e.g. what lawyers call “Acts of God,” which include riots, floods, fires, earthquakes, and “other forces beyond the control of either party”), (f) tax information for and from the winner(s), (g) and the requirement of an affidavit of eligibility for each winner.

There are many examples of sweepstakes official rules that will help you get an idea of how to structure the document, but each sweepstakes may have a unique set of requirements. Accordingly, you will likely need to consult with an expert  to modify the rules to fit your particular situation.

6.      What do I do when the sweepstakes is over?

You will need to be aware of certain laws even after the sweepstakes is finished. Most states require you make available a winner’s list for a specified period of time (plan on at least four years for a widespread sweepstakes) and promptly respond to requests for the list. You may also be required to post the list. If you posted a bond in order to run the sweepstakes (for example, if it the prize value exceeds $5,000 and you promote it in NY or FL), you will need to provide a winner’s list in order to release the bond. Still some states may require you to retain all entry materials for a specified period of time.

Due to recent changes in tax law, any winner who receives a prize with a value equal to or exceeding $600 will trigger the requirement to provide a 1099. Accordingly, you may need to collect tax information from winners to properly report on a 1099 form.

You will also need to retain any affidavits, including eligibility, disclaimers, as well as publicity releases and properly account for their administration in compliance with your privacy policy.

Sweepstakes raise many legal issues for business owners and managers, but the potential reward if your promotion goes viral can certainly justify the risk, time, and money involved in running a legitimate promotion through your social media platform. If you properly structure your sweepstakes, it can become a compelling part of your brand’s success story.

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Stayed tuned for “Social Media Legal Issues: (Post Number 2): FTC Rules Applicable to Your Social Media Strategy,” and please let us know if you have questions, comments, or critiques for this or any other post.

        


Gideon Dionne

Gideon has fly fished for trout in rivers on three continents.


146 N Canal Street, Suite 350   |   team@invigorlaw.com